Monday, September 27, 2010

Dow 3000? Robert Prechter Thinks So

Before I start this piece let me acknoledge all of the Prechter haters that I hear from everytime I bring him up.

He was back in the news after doing this CNBC interview today: 

My Take:

I found it amusing that the DOW sold off as Prechter was preaching his doom and gloom only one day after hedge fund giant David Tepper's comments triggered a 200 point rally.

Like all analysts, Prechter has gotten things wrong at times just like everyone has at one time or another.  This doesn't mean that his comments should not be taken without merit.

In fact, I will take Prechter over any economist out there becasue I can't name an one besides David Rosenberg that has gotten anything right in the last few years.

Now, let me get this straight, do I think the DOW is going to hit 1000, 2000, or 3000?  I have no idea.  If it does I hope you have some canned goods and gold in the basement because this country will not be able to function properly after a 90% correction.

What I do know is Dr. Prechter made some excellent points during his analysis which is all I ever care about.

I couldn't agree more with him when it comes to the high yield bond market.  Folks, they are called junk bonds for a reason.  The fact that the market can't buy enough of stuff that's most likely worth zero without mark to market accounting standards is frightening to say the least.

I feel like I am watching a group of sheep being led to slaughter as I watch stock brokers continue to pile their clients into this toxic debt.

I thought Prechter's information around fund managers sitting in only 3% cash(which is the lowest levels since the crash) was also very telling. 

Here is the first question that comes to my mind after hearing this:

How is the market going to move higher if the fund managers are 97% "all in" at this point? 

The DOW has gone NOWHERE in about a year.  Is this the best they can do while sitting in only 3% cash?  To be fair I am sure they have significant positions in bonds after their huge run.

I would love to know what % of bonds these funds hold.

Prechter is basically calling for a classic delfationary death spiral.  The dollar soars and equities crash in such a scenario.

At this point this would be considered a classic contrarion view when you listen to the market participants. 

Calling deflation the  "contrarion view" first appears to make no sense when you see what happened to the 10 year today(as well as the whole year):

Both camps can make their case when you look at the markets. The hyperinflationists scream "look at $1300 gold!"  while the deflationists Rspond by screaming " look at bonds!".

Too see such market dislocations is really unprecedented.  Talk about mixed signals.

Nonetheless, the hyperinflationists seem to be in the lead for now because the Fed looks to be heading straight towards the QEII path.

OR have they.....

The Wall Street Jornal is reporting tonight that the Fed might end up somewhere in between as they contemplate trialling a "mini" QEII:

"Rather than announcing massive bond purchases with a finite end, as they did in 2009 to shock the U.S. financial system back to life, Fed officials are weighing a more open-ended, smaller-scale program that they could adjust as the recovery unfolds.

The Fed hasn't yet decided to step up its bond purchases, let alone agree on an approach. After its last meeting, the Fed's policy committee said it was "prepared" to take new steps if needed. A call on whether to buy more bonds depends on incoming data about economic growth and inflation; if the economy picks up steam, officials might decide no action is needed

A leading public proponent of a baby-step approach, James Bullard, a 20-year Fed veteran who has been president of the St. Louis Federal Reserve Bank since 2008, says he has made progress convincing his colleagues to seriously consider that approach. "The shock-and-awe approach is rarely the optimal way to conduct monetary policy," he says. "I really do not think it is the right way to go except in really exceptional circumstances."

Under a small-scale approach, Mr. Bullard says, the Fed might announce some target for bond buying, say $100 billion or less per month. It would then make a judgment at each meeting whether continued action was needed, he says, based on whether "we're making progress toward our mandate of maximum sustainable employment and inflation at our implicit inflation target."
The Bottom Line:

So does the "deflationist" Robert Prechter have it right or will the inflationists be proven right as we watch the dollar crash as the Fed caves into the pressure of Wall St's QE2 demands?

The question remains unanswered in my view.  Who knows, maybe they will both be right and we see a little of both when it's all said and done.

For now, today's article in the WSJ suggests that the Fed might be backtraking from their FOMC statement last week.  I had suggested on Friday that they might have painted themselves into a corner with their statement.  The last thing they want to do is to lead the market into thinking "don't worry, we got your back". 

There is enough specualtion in the market as it is.  This has resulted in a total lack of confidence by most investors who have responded by getting out of the game.

Tonight's article tells me that maybe they are realizing that they might have gotten ahead of themselves with all of their QE2 talk.

Althought I am against any QE, Bullard's arguement makes the most sense if they are going to pull the trigger.

There is nothing wrong with testing the waters.  You don't need to jump all in at once whenever a crisis arises.  We have repeatedly done this during our crisis. This often leads to catastrophic mistakes.  TARP anyone?

One thing is for sure, the market really doesn't know what do believe and they are hedging their bets by owning both gold and bonds in order to protect themselves from either scenario.

Disclosure:  No new positions taken at the time of publication


vorimosi said...

Dow 3000 is quite bullish for prechter. Check out this article from 1989 - 21 years ago when Robert Precther and a buddy were arguing over whether the bear market leading to "the great depression, part II" would begin in 1990 or a bit later.

At the time, dow was around 2,000 and he was predicting it would go down to 400. Thus, now predicting it will go to 3,000 is quite an improvement.

I really feel sorry for the Prechterphobes. Mark Hurlburt indicates that following Prechter's advice for the last 20 years would net you -97.5% ROI.

Think about that - 100K invested with Prechter will be worth only 2,500 today. Amazing he still gets airtime...

Jeff said...


Great stuff

Thanks for sharing.

I agree. His short term analysis is good.

Its the uber bearish macro picture that he paints that I don't get.

If the market goes that low there may not even be a stock market

Nonetheless, a smart guy which is why I guess he gets airtime.

I think he is good at finding "danger" areas of the market.

I can't take DOW 1000 seriously though either.

Anonymous said...

"Nonetheless, a smart guy which is why I guess he gets airtime."

No. Just like it is with CNBC, being smart doesnt get you airtime. Being an outlandish idiot with extreme views (I.E. Dow will EXPLODE up to 40,000 by 2012, or dow will CRASH down to 3,000 by 2012) will get you airtime.

Either one gets the viewers all agitated and they tune in just to nod along (if they agree with them) or yell profanities at the idiot on the TV if the dont.

Look at that link vormosi provided. In any other industry, being that wrong, that long will marginalize you forever (as it should). However, no one in the MSM ever dares to show how bad someone's track record is. Their thinking is, "hey, as long as the guy is good for continuing extremist quotes, we'll forget everything he said and give him airtime!!!"

Dont be a pawn of the MSM. They are the puppet masters trying to get us viewers to respond to sensationalistic bearish or bullish talking heads. Dont fall for their bait.

Jeff said...


I totally agree.

I just mean the sentiment is ridiculously bullish at CNBC.

When they do have a bear on I usually pick up a few nuggets from whoever is on because they tend to be more truth tellers.

I thought Prechter's high yield bond data was good stuff.

COuldn't agree more that he is more of a headline grabber that has a horrible track record.